Question

In: Accounting

Please discuss the criteria that an auditor uses to make a decision to either apply analytical...

Please discuss the criteria that an auditor uses to make a decision to either apply analytical procedures as substantive tests or to perform substantive tests of transactions and account balances. There will be environmental and control criteria to be discussed.

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Expert Solution

Answer :

There are two types of Procedures to obtain Sufficient and Appropriate Audit Evidence (SAAE). They are i) Compliance Procedure(Test of Control) and ii) Substantive Procedure.

Compliance Procedure : It is called as test of Internal controls which play an important role within the organization as it is a check of internal process and every adminstration activity.

It includes test of i) Whether Internal Control exist in the entity?

ii) Whether internal controls are effective or efficient ?

iii) Whether internal controls are exist and effective during the year or not.

Substantive Procedure :

It is known as detailed or indepth procedure.

It is of two (2) types: a) Analytical Review procedure and b)Test of transactions/ Test of Details procedure.

a) Analytical review procedure: Analytical procedures consist of ‘evaluations of financial information through analysis of possible relationships among both financial and non-financial data.

b) Test of Details: It is more reliable than analytical procedure but it is time consuming. It is of two types Vouching for test of occurance of transactions and Verification for test of Account Balances ( Assets and liabilities)

Criteria of Auditor to decide Analytical procedures or Test of transaction:

  • In case of Large Volume of transactions - Analytical procedure is applied as it covers more transaction however test of details gives accuracy.
  • Analytical procedure is used at every stage of Auditing as preliminary ( to understand business environment), Substantive Procedure when auditor considers it as more efficient and effective than test of details
  • Final Analytical Reveiw as overall review of financial statements at the end of the audit to assess whether they are consistent with the auditor’s understanding of the entity.
  • Auditor should perform feasible study to evaluate whether it is logical to apply analytical procedure on a particular area.Generally it is applied to those areas which are predictable in nature.
  • Auditor should obtain reliable and relevant base data to understand relationship between financial and non financial data. Based on Base data auditor creates expectation and compare with actual data to find out variances.

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